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Competition, recruitment cost slash operating income at UPMC

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Increased competition from other insurers and the cost of recruiting new doctors led to a drop in UPMC's income in the July-September quarter.

Western Pennsylvania's largest hospital system reported operating income of $72.3 million, a decline of more than 50 percent from the same period a year ago, when it had operating income of $153.3 million.

UPMC paid more for salaries and benefits for its employees and spent $25 million to recruit physicians, said Robert DeMichiei, chief financial officer.

The system employed 3,321 doctors as of Sept. 30, up from 2,954 on Sept. 30, 2011.

Doctors are key to a health system's financial strength, because they put patients in hospital beds. A top neurosurgeon, for example, can bring in millions of dollars in annual revenue to a hospital, experts say.

And competition for new physicians has heated up in the last year as Highmark Inc., the state's largest health insurance company, recruits doctors for its own health system.

For example, a bidding war broke out last year between Highmark and UPMC for what was previously the region's largest independent physician's practice, Premier Medical Associates in Monroeville. Highmark paid $70 million to acquire the practice in January, Keith Ghezzi, interim CEO of West Penn Allegheny Health System, testified in Allegheny County Common Pleas Court last week.

Also facing strong competition is UPMC's insurance division, UPMC Health Plan, DeMichiei said.

While it increased membership to 2 million people, as of Sept. 30, up from 1.7 million at the same point last year, the region's second largest health insurer behind Highmark had to reduce premiums to increase its business, DeMichiei said.

That rate squeeze reduced income by $15 million during the quarter, he said.

“We're seeing significant competition,” he said.

UPMC Health Plan not only is trying to take business away from Highmark, which controls more than 60 percent of the health insurance market in Western Pennsylvania, but there are now four national insurers also competing for business in Pittsburgh.

Last year, UPMC signed new reimbursement agreements with Aetna Inc., Cigna Corp., HealthAmerica and UnitedHealthcare, giving the companies full access to UPMC's 19 hospitals and its more than 3,300 physicians. At the time, UPMC was trying to end its relationship with Highmark and wanted to give Highmark's customers options for keeping in-network access to UPMC.

UPMC and Highmark in May agreed to a contract extension that will keep UPMC in-network for Highmark members until the end of 2014.

During the quarter, UPMC's revenue was $2.45 billion, up slightly from $2.41 billion a year before.

While patient volume increased overall, DeMichiei said growth came from less-profitable observation cases at its hospitals.

In an attempt to rein in rapidly rising health costs, many insurers in recent years have classified hospital stays as observations, rather than admissions. DeMichiei said observations are reimbursed at a lower rate than admissions, even though both require the same amount of hospital resources.

UPMC's observation cases increased by 23.4 percent, while admissions declined by 1.8 percent during the quarter, compared to the previous year.

While admissions are declining, DeMichiei said UPMC is outperforming the trend in Western Pennsylvania, which had admissions drop 2.5 percent during the same time period.

“We're not shrinking as much as the market is,” DeMichiei said.

Net income during the quarter was $180.2 million, compared with a net loss of $120.1 million the year before. Net income includes investment gains and other nonoperating income that doesn't come from providing medical services.

UPMC brought in $104.8 million from investing and financing activities, compared with a loss of $273.4 million the year before. The gain increased the value of the system's “reserve portfolio” to $3.9 billion, as of Sept. 30, “its highest level ever,” Treasurer Tal Heppenstall said.

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or

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